Finance 101 with Alexa Von Tobel
A Millennial’s Guide to Money.
I CAN'T LIVE WITHOUT
My FitBit (and my husband)
I RECENTLY READ
Happy Money, by Michael Norton & Elizabeth Dunn
WOMEN WHO INSPIRE ME
Penny Pritzker, the US Secretary of Commerce. And, of course, my mother!
“Your finances start at 22,” says Alexa Von Tobel, CEO of LearnVest.com and author of Financially Fearless. Regardless of your starting pay, “I think you can get to such a healthy place by being smart early and avoiding mistakes.”
A Harvard alum who left business school to launch her own venture, Alexa’s life’s work is increasing financial literacy and making financial planning accessible to the masses.
We sat down with Alexa and asked her to give us the essential principles for laying a smart financial foundation—from day one.
1. Have a plan.
Not having a plan is a plan—it’s a really bad plan. Finances are like anything else in life, if you don’t have a step-by-step game plan, you’re unlikely to get what you want.
2. Understand your financial landscape.
I look at this as a three-part process: Know your take-home pay. You don’t make $100,000. You likely make $68,000 after taxes. Know where your money is going. Use an app like LearnVest to track to the penny what you’re spending each month. Know what you don’t know. Talk to an expert and get a second opinion to help inform your financial decisions
3. Stop being embarrassed about your “embarrassing questions.”
Ask them now—How much can I afford in rent? What’s a 401k?—when you have time to figure them out and make smart decisions.
4. Establish a budget.
Starting with your take-home pay, try following the 50/20/30 rule: 50% to essentials (a roof over your head, transportation, grocery bills and utilities), 20% to the future (contributing to your retirement accounts, paying off debt, saving for a home) and 30% to lifestyle choices (Equinox, your fall wardrobe, holiday travel).
5. Max out your retirement accounts.
Tackling retirement savings in your 20s is one of the most valuable ways to have extra money in your 60s, 70s and 80s. Compounding interest is not magic, it’s just math—and it’s amplified when you start early. If you can, max out your retirement contributions each year. For 2014, that means putting $17,500 in a 401k and $5,500 in an IRA.
6. Build an emergency savings fund.
Set aside at least six months’ worth of take-home pay in case anything unexpected—medical expenses, job loss or a career change—happens down the road.
7. Prioritize your debt.
Consider consolidating student debt. You can only do it once, so get a second set of eyes to help ensure you do it properly. Most people sprint to pay down student debt before credit card debt, which is usually the wrong decision. Student debt is often the least expensive of the two, so you should aim to pay off credit card debt first. Rather than trying to pay down your student loans, it’s oftentimes more important to prioritize funding your retirement accounts and pay the minimum on your student loans until you’re further along in life.
8. Make wise spending decisions.
Assume your cable bill is $100/month. That’s an extra $1,200 that could be going into your 401k. If your employer matches your contributions, that’s an extra $2,400. Instead of cable, try using Netflix for $7.99/month. That extra cash going into your 401k today could mean an extra $250,000 towards your retirement.
9. Manage your credit.
Know your FICO, or credit score. A good score can save you significant cash, while a poor score will cost you with high interest rates—or a failure to qualify for a loan altogether. Your credit score will best benefit from on-time payments, so make this a priority. Credit card utilization is another factor of your credit score that you can easily influence. I recommend maintaining a balance that’s less than 30% of your limit.
10. Talk to an expert.
I’ve said it before: you need to have a game plan. Speak to someone who knows what they’re doing. It’s critical to take all of your financial topics into account together. Don’t tackle them in isolation.
Want more? Check out LearnVest.com to be matched with an expert who will put together a financial plan based on your individual goals and specific financial accounts.